Natural Gas:

Last summer's Energy Policy Act of 2005 authorized $1.5 billion for research on ultra-deepwater drilling and other unconventional methods to discover new oil and natural gas reserves. But with energy companies announcing record profits and growing consumer concern about gasoline prices, President Bush and Republican lawmakers want to rein in spending seen as benefiting the oil and gas industry. During today's OnPoint, Melanie Kenderdine, vice president of the Gas Technology Institute, defends the controversial deepwater drilling program and explains why the research is needed to boost energy supplies.

Transcript

Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining me today is Melanie Kenderdine. She is the vice president of the Gas Technology Institute. Melanie thanks a lot for being here today.

Melanie Kenderdine: Thank you for having me Brian.

Brian Stempeck: Now the president gave a speech last week, a major speech on energy. And he talked about calling on Congress to remove $2 billion worth of tax breaks that directly affect your organization in terms of deepwater drilling, exploration of energy and some very difficult type of areas. How does this affect your organization and what was your reaction to the speech?

Melanie Kenderdine: My reaction to the speech, let me answer that question first, my reaction to the president's speech is it's very understandable that the president and members of Congress want to try and address the high prices of energy right now. They are extraordinarily high. And I spent eight years in the Clinton administration. The last year, 2000, we also had high prices. They were so low compared to what they are now it almost seems quaint. But we also worked very hard to respond to those price increases. So I understand that American consumers are affected by the high prices and so the reaction is understandable. The tax incentives, the $2 billion in tax incentives that the president seeks to repeal, that were in the Energy Policy Act, are just that, they're tax incentives. The program that we are working on is a gas research program. It is not a tax incentive. It's not a subsidy. It's R&D and I would make a clear distinction between an R&D program and a tax subsidy.

Brian Stempeck: At the same time though, I mean the argument seems to be from the White House, from Republicans in Congress, that with oil and gas prices as high as they are right now that seems to be incentive enough to drive these companies to do research on their own. Why should the federal government be paying for any of this when you have oil at $70 plus per barrel?

Melanie Kenderdine: That argument seems to make sense on its face. If you just peel it back, just one bit, the top 20 corporations in the world that invest in R&D investments, not one of them is an energy company. So energy companies are not investing in R&D in significant ways. The U.S. government doesn't compel our corporations to invest in R&D. And Exxon, for example, does have an R&D budget. They have a large R&D budget. The research that they do is proprietary research. Their research is designed to maximize their profits. It's not designed to serve the public interest and do research that would actually increase natural gas supply. When you increase natural gas supply through research and new technologies you actually lower the price of the commodity. And it's not necessarily in the interest, nor should it be, of private corporations to lower the price of their product. So what we are looking at is public benefits research that would be available to a wide range of organizations. And research would be done under that program to provide the public with lower costs, more affordable domestic energy supplies, specifically natural gas.

Brian Stempeck: Talk a little bit about exactly how this program works. This was included in the energy bill that was passed last summer. It primarily focuses on deepwater drilling and this money would basically be distributed through a consortium that you were the founder out, correct?

Melanie Kenderdine: Right. It's not primarily focused on deepwater drilling. That's kind of shorthand that opponents of the legislation have put out on the wire. It is more focused on unconventional onshore natural gas supply R&D. Unconventional onshore gas is produced largely by small independent producers in the Rocky Mountain West and the Southwest and the South. And so it's not focused primarily on ultra deepwater drilling. And I would say that Exxon has always opposed this program. It would level the R&D playing field for all of the small independent producers who don't have any research infrastructure up their own. They're small. You know many of them are very small operations, so they don't have any research capability, but they would benefit enormously from the results of research. They don't get results from Exxon's proprietary research. Therefore Exxon has always opposed it. DOE would manage the program, Department of Energy. They would oversee a managing consortium that would consist of industry experts. It's a 501(c)3 nonprofit consortium. We have put together a consortium to compete for that program, to manage it. The consortium wouldn't perform the research. It would set the priorities basically. And the consortium that we put together has 20 major research universities in it. MIT and Stanford are members, New Mexico Tech, Louisiana State.

Brian Stempeck: At the same time though this consortium is very controversial. Halliburton is also involved, Marathon. And this is located in Tom Delay's district in Texas, correct?

Melanie Kenderdine: It is. The headquarters is located in Sugarland, Texas.

Brian Stempeck: How do you respond then, I mean there's a lot of criticism of this. The White House, President Bush opposed this before it was included in the energy bill last April. He came out, again in his speech last week, and said he opposes it. Members of Congress were angry that it was basically snuck into the energy bill conference report after the conference negotiations had finished. It was kind of a deep of night type thing. What the Democrats were saying is it was snuck into the final bill. Given that you're seeing opposition from Congress, from the White House. The Energy Department zeroed out the budget for this program in their FY07 budget. Aren't you kind of really going against the grain here in trying to fight for this? If you have Republicans all over taking a lot of heat on these energy issues, why fight for this program?

Melanie Kenderdine: The legislation has passed the House three or four times. It was first included in the energy bill in 2001. It has passed the Senate, I believe, twice in the last five years. So saying that it was snuck in in the middle of the night is incorrect. And I think that ...

Brian Stempeck: Into the final conference report, that is correct.

Melanie Kenderdine: There was a placeholder in the conference report and ...

Brian Stempeck: With no language in the placeholder language, correct?

Melanie Kenderdine: The language was included in the earlier version. The only piece of dispute was the amount of the funding. The structure of the program has never changed in five years. It's always been the funding and how it's funded and the amount. And I think that participants, the final four, the Big Four as they called them in the conference, would disagree with the characterization that you've just given. But my job is not to discuss or even know the process as to how they made decisions in the final hours of the conference. What I can tell you is that it has passed the House and the Senate many, many times in basically the same format form that it currently exists. It's law. We're not talking about legislation here. It was passed into law by both the House and the Senate. It had bipartisan support when it passed.

Brian Stempeck: But there has been a lot of speculation though that this is basically a pet project of Congressman DeLay. There's a Boston Globe story saying this. The New York Times was also kind of saying the same line of attack. There's a lot of speculation now that with Tom DeLay's stepping down, with no one in that position of power, that this program might not make it. Is it solely contingent on his power in Congress?

Melanie Kenderdine: Congressman DeLay has never been a sponsor of the legislation. The legislation was always sponsored by Congressman Ralph Hall. And Mr. Hall, I think, would joke that it has bipartisan support because when he first introduced it and when it first passed the house he was a Democrat and he's now a Republican. So he has supported it and been a sponsor both as a Democrat and a Republican. The consortium headquarters is in Sugarland, Texas. The Fortman County Economic Development Corporation, we had been in existence for well over a year, perhaps a year and a half. We had an operating virtually, they were trying to incubate energy technology companies, the Fortman County organization was. And offered our consortium two years free rent if we would move there. That's how we ended up in Sugarland, Texas.

Brian Stempeck: Can you see though, politically, why the White House would want to distance itself from this? I mean with all of the scandal with Jack Abramoff, with Tom DeLay, with this idea of corruption in Congress. You have the energy crisis, Republicans in real danger at the polls this fall. This seems like the last type of project they'd want to be involved in.

Melanie Kenderdine: The program is based on very sound policy. The National Petroleum Council, when I was at the department in 1999, recommended that if you're going to meet U.S. natural gas supply you need to essentially drill in deeper water and deeper wells, unconventional onshore, ultra deepwater offshore was where we were going to have to find the supply. You need new technologies to develop that supply. And they also recommended, which is kind of highly unusual for the National Petroleum Council, they recommended increased cooperation between industry, universities, academia and that the government. That's exactly what we have tracked and created here. It's good policy. I really can't, I don't want to comment on the politics of Jack Abramoff. That's not our business.

Brian Stempeck: Just thinking of the program itself. You know the Energy Department seems to take issue with it. In their FY07 budget request there was an energy Department official that said that some of the oil and gas research programs were quote "not demonstrating clear results". They said that, I mean, a lot of these programs aren't really ...

Melanie Kenderdine: There is confusion. DOE has a core oil and gas R&D program. That's what that language references. This is a new program. There's nothing in this program that they could even be commenting on in terms of past performance because it's a new program. That language is referencing their existing program. That's what the White House recommended would be an easy road out.

Brian Stempeck: What kind of progress, I guess, would be lost if this program is, in fact, cut? I mean we're hearing a lot of talk in the past week, amendments offered to, you know, a wide variety of bills in the House and Senate. Trying to strip this, trying to add new energy tax measures, that sort of thing. What is, I guess, the ultimate impact if this program is killed from current law, is repealed? What is the impact on natural gas supply?

Melanie Kenderdine: In 2003 a similar version of this passed, essentially the same program, actually a little bit more money in 2003. The energy information administration was after that, that bill was filibustered. After EIA, after the bill went down in the filibuster, Senator Sununu asked for an analysis of the conference report. This provision, they said, was one of the few provisions in the entire energy bill that would actually increase gas supply. It would increase gas supply by 2025 by 20 percent. That's a significant amount of new natural gas. And there are two things that you can do in the near to midterm in order to make supplies of energy more affordable for American consumers; you can increase supply and you can decrease consumption. In the long term we're going to have to get off oil and you're going to have to go to alternative and renewable fuels. In the midterm you need to either conserve, reduce your demand or increase your supply. This will increase supply. EIA said, in that analysis, that it would lower the price of natural gas to American consumers by 20 percent. And that it would increase supply by 20 percent. That's the impact of the program. Natural gas production is very, very sensitive to new technology. This is an R&D program. The universities, the 20 universities that are participating in our consortium, that's the intellectual base of our energy structure in this country. That's the future workforce for the next generation of energy technologists. They won't have the benefit of this kind of research.

Brian Stempeck: One last question for you because we're running out of time. Given all the controversies surrounding the energy companies right now, surrounding what Congress has been doing on energy incentives, do you think when all is said and done, this provision will stay in current law?

Melanie Kenderdine: I think that if they, they are reacting to the pressure of the moment. That when the members step back and look at things that are good policy this is a very good program. It's a good R&D program. It's not a tax subsidy for big oil. It is a research program. I work for a research company myself and anyone who does research takes offense at the notion that research is a subsidy. Research has a lot of benefits. In this instance it's a benefit to consumers, but it also is an enormous benefit to the academic institutions, to the research institutions, to the five national laboratories that are members of our consortium. It provides a pipeline of funding for them to do the research that we need to transition to a sustainable energy future.

Brian Stempeck: All right, Melanie, we're out of time. Thanks so much for being here today.